How to Use This Report

Economy Section

Oil and gas are vital to providing the energy required to fuel economic growth.  As the world population and the demand for a better standard of living grows, demand for oil and gas will grow.  The remarkable growth in China’s and India’s economies is cited as the cause of the spike in oil demand.  These economies will also stimulate the growth of the natural gas market to diversify energy sources and because of the low pollution characteristics of natural gas.

Issues to monitor:

• China’s economy is a major driver for commodities including oil.  A slowdown in China’s economy should have a negative impact on oil prices.  Unfortunately, China’s economy is not as transparent as that of developed countries, so China’s economy is difficult to monitor.
• The U.S. economy is the world’s largest, so changes in our economic outlook will impact the rest of the world.  Consumer economic activity makes up about 70% of the entire country’s economy, so issues that affect consumers are closely monitored.
• Interest rates, inflation and the value of currencies are important factors in the economy.  The world’s central banks monitor inflation and tend to increase interest rates when inflation rises.  Higher interest rates slow down the economy, which in turn reduces inflation.  U.S. consumer debt has grown to unprecedented levels.  A large source of borrowing has been home refinancing.  A slowdown in the housing market will leave less equity in homes and counter the “wealth effect” created by rising housing prices.  An increase in interest rates will make repayment of loans more difficult.  Higher interest rates will also increase the cost of borrowing, which will slow down business expansion.
• Currency valuations are a very complex subject.  A drop in the value of a country’s currency makes the cost of imported goods higher, which increases inflation.  However, a drop in the value of a country’s currency makes a country’s exports less costly to other countries and tends to stimulate industrial activity.  The U.S. trade deficit is growing, which puts more dollars in circulation around the world.  Countries have been using these dollars to finance U.S. borrowing so that Americans will continue to buy their goods and services.  Alan Greenspan believes that the world may soon have all of the dollar assets that it wants.  When that happens, the value of the dollar could fall.